2018 NLSC 155, 2018 NLSC 155

court crest IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR GENERAL DIVISION (IN BANKRUPTCY) Citation : Michael John Drover in Bankruptcy , 2018 NLSC 155 Date : July 17, 2018 Docket : 20170121281 In The Matter of the Bankruptcy of Michael John Drover of the Community of Flatrock in the Province of Newfoundland and Labrador Before: Justice Robert P. Stack Place of Hearing: St. John’s, Newfoundland and Labrador Date of Hearing: March 15, 2018

Summary: The Bankrupt, a disbarred lawyer, applied for his discharge from bankruptcy. The discharge was opposed by the Law Society of Newfoundland and Labrador and by the Custodian of his law practice. The Court found that two facts under section 173(1) of the Bankruptcy and Insolvency Act were established – that the Bankrupt engaged in fraudulent activity, and that he can be justly held responsible for the fact that his assets are less than fifty cents on the dollar. It was ordered that the Bankrupt be discharged on the condition that he enter into a Consent Judgment jointly in favour of the Law Society and the Custodian in the amount of $50,000. Appearances: Michael Drover Self-represented

The Law Society of Newfoundland and Labrador and the Custodian of the Law Practice of Michael Drover PLC Inc. Ian Kelly, Q.C. Trustee in Bankruptcy Noel Andrews, on his own behalf Authorities Cited: CASES CONSIDERED: Re Crowley, [1984] N.S.J. No. 52, 54 C.B.R. (N.S.) 303 (N.S.S.C.); Coyle, Re, 2011 NSSC 238; Herdman,Re, (AB KB), 1992 CarswellAlta 278 (QB); Re Aby, (SK KB), [1995] S.J. No. 677, [1996] 2W.W.R. 488 (Sask. QB); Korea Data Systems (USA), Inc. v.

Amazing Technologies Inc., 2015 ONCA 465; In Re Goldstein, 2011 ONSC561; Re Hayden, 2000 ABQB 630; Re Bourque (Trustee) 2001 NBQB 147; Snedden, Re, 2004 NLSCTD 60; Wirick, Re, 2004 BCSC1826; Wirick, Re, 2005 BCSC 1906; Wirick, Re, 2006 BCSC 1273. STATUTES CONSIDERED: Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3; Law Society Act, 1999, S.N.L. 1999 c. L-9.1. REASONS FOR JUDGMENT Stack, J.: INTRODUCTION [1] Michael Drover (the “Bankrupt”) filed an Assignment in Bankruptcy on July 28, 2016. Noel Andrews of Noel R.

Andrews &Associates Inc., was named the Trustee in Bankruptcy (the “Trustee”). [2] Being a first time bankrupt, in the normal course the Bankrupt would have received an automatic discharge from bankruptcyon April 29, 2017. A hearing has become necessary, however, because his discharge is opposed by the Law Society of Newfoundlandand Labrador (the “Law Society”) and the Custodian of the law practice of the Bankrupt and Michael Drover PLC Inc. (the “Custodian”)(collectively the “Creditors”).

The Creditors’ opposition arises out of the fact that the Bankrupt was found by an Adjudication Tribunalof the Law Society to have committed fraud. [3] Should I deny the Bankrupt’s request for an absolute discharge from bankruptcy?

In considering what order or disposition tomake, I must consider the Creditors’ claims that the Bankrupt has been guilty of fraud or fraudulent breach of trust, that he has failed toaccount satisfactorily for any loss of assets or for any deficiency of his assets, and that his assets are not of a value equal to fifty cents onthe dollar on the amount of his unsecured liabilities because of circumstances for which he should justly be held responsible. facts [4] On October 20, 2014, the Law Society completed a Practice Review Report into the law practice of the Bankrupt andMichael Drover PLC Inc. (his professional services corporation).

The report disclosed serious issues with the law practice. On November24, 2014, the Complaints Authorization Committee suspended the Bankrupt from the practice of law. [5] As a result of the suspension of the Bankrupt, Brenda Grimes, Q.C., the Executive Director of the Law Society (“Grimes”),applied to the Supreme Court of Newfoundland and Labrador to be appointed as the Custodian of his law practice.

The application wasgranted on November 24, 2014. [6] A subsequent review of the client files and trust accounts of the Bankrupt and Michael Drover PLC Inc. revealed breaches ofthe Law Society Trust Account Rules, including fraudulent misappropriation of client funds and fraudulent breach of trust with respect toclients’ funds.

The review disclosed that funds were being wrongfully and fraudulently diverted from the law firm trust account to thebenefit of the Bankrupt and his wife, Susan Drover, as well as SAM Design Inc., a company owned and controlled by Susan Drover. [7] On March 2, 2017, an Adjudication Tribunal of the Law Society determined that the Bankrupt had misappropriated clientfunds, and had lied to and intentionally misled clients and the Law Society in an effort to conceal his misconduct. The Adjudication

Tribunal found that the allegations had been proven and that the Bankrupt was guilty of conduct deserving of sanction. [ 8 ] On April 19, 2017, the Adjudication Tribunal filed its decision on sanction with regard to the above misconduct. It was determined that the Bankrupt should be disbarred, and that he be ordered to pay the costs incurred by the Law Society in its investigation as well as the costs incurred in relation to the appointment of the Custodian.

The Bankrupt was disbarred effective May 3, 2017. [ 9 ] Apart from the discipline process, the Custodian has been involved in ongoing efforts to recover the misappropriated client funds. On February 18, 2016, a Statement of Claim was issued in the Supreme Court of Newfoundland and Labrador by the Custodian against the Bankrupt, Michael Drover PLC Inc., and Susan Drover (the “Recovery Action”). The action sought recovery of misappropriated client funds in the amount of $181,283.97.

Also on February 18, 2016, a notice of lis pendens was registered in the Registry of Deeds for Newfoundland and Labrador with respect to a property registered in the name of Susan Drover. [ 10 ] Susan Drover subsequently paid $181,483.97 to the Custodian and the Recovery Action was discontinued against all parties.

Although a release was provided to Susan Drover and SAM Design Inc. , no release was provided to the Bankrupt due to the fact that reviews of his client files and trust account, as well as the winding up of his law practice, were still ongoing. [ 11 ] The Bankrupt filed an assignment in bankruptcy pursuant to the Bankruptcy and Insolvency Act , R.S.C., 1985, c. B-3 (the “ BIA ”) .

Proof of Claim documents were filed with the Trustee on behalf of the Law Society and the Custodian. [ 12 ] The Law Society Proof of Claim in the amount of $703,601.28 is comprised as follows: Final Amounts $ 5,487.67 - Assurance Fund claim paid Contingent Amounts $ 68,371.00 - Assurance fund claim to be assessed and determined $278,969.00 - Assurance fund claim to be assessed and determined $259,369.00 - Assurance fund claim to be assessed and determined Cost Amounts $ 91,404.61 - Discipline proceeding costs to December 31, 2016 TOTAL $703,601.28 [ 13 ] The Custodian Proof of Claim in the amount of $305,937.32 is comprised as follows: Final Amounts $ 14,356.90 - Out of trust amount Cost Amounts $291,580.42 Custodianship costs to December 31, 2016 TOTAL $305,937.32 [ 14 ] The foregoing facts are as set forth in affidavits sworn by Grimes on each of April 19, 2017 and May 8, 2017. [ 15 ] On February 26, 2017 the Trustee swore an affidavit.

The Trustee says: 3. The Bankrupt has complied with the duties prescribed to him under the Bankruptcy and Insolvency Act and has submitted monthly statements of income and expense to me for the period August 2016 to January 2018. As per Directive 11R2 of the office of the Superintendent of Bankruptcy, the Trustee is required to calculate the amount, if any, that a Bankrupt is required to pay to his estate in respect of Surplus Earnings during the eighth month of the term of the bankruptcy. During that period the Bankrupt had reported average net monthly income of $2,528.00 per month.

I have estimated the income tax payable on the reported earnings to arrive at the net amount noted above. I have prepared the 2016 pre and post bankruptcy personal income tax returns based on the reported income with a resulting amount of $1,807.49 payable to CRA for the 2016 post-bankruptcy period. [ 16 ] As to the Bankrupt’s current status, the Trustee says: 4. The Bankrupt advises me that he was separated from his former spouse and that he has joint custody of his two minor children.

The 2016 Superintendent’s Standards used to determine the amount, if any, payable to an estate from a Bankrupt’s wages, for a family of two (allowing the Bankrupt credit for one minor child) was $2,601.00, $2,640.00 for 2017 and an estimated amount of $2,693.00 for 2018. The Bankrupt’s net monthly income was below the amount allowed under the Superintendent’s Guidelines therefore I determined that the Bankrupt did not have Surplus Earnings during the initial seven month term of his bankruptcy term and therefore was not required to make surplus income payments to his estate.

A calculation of the reported net income for the period August 2016 to January

2018 shows net monthly income of $2,203.00. It should be noted that the Bankrupt has declared his earnings as “self-employed”earnings with no deductions for statutory amounts including CPP, EI or income tax. He has advised me that he is working in theconstruction industry and is paid $20/hr. His reported income for the last four months was as follows: October, 2017 - $2,400.00,November - $1,200.00, December - $800.00 and January, 2018 - $1,600.00 with no statutory deductions withheld at source. [17] The Trustee reports that the estate of the Bankrupt has realized $1500.04. No further realization is anticipated.

The Trusteedoes not anticipate any dividend being paid to the Bankrupt’s unsecured creditors. issues [18] The following issues are raised in the present application: a. Should the Bankrupt be denied an absolute discharge from bankruptcy on the basis that: i. The Bankrupt has been guilty of fraud or fraudulent breach of trust; ii. The Bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the Bankrupt’sliabilities; and iii.

The assets of the Bankrupt are not of a value equal to fifty cents on the dollar on the amount of the Bankrupt’s unsecuredliabilities, and the fact that the assets are not of a value equal to fifty cents on the dollar on the amount of the Bankrupt’s unsecuredliabilities has arisen from circumstances for which the Bankrupt can and should justly be held responsible; b. What order or disposition should the Court make? analysis Should an absolute discharge be denied? [19] The bankruptcy process in Canada is governed by the BIA.

The BIA seeks to establish a balance between protecting the rightsof creditors, and allowing a bankrupt to be rehabilitated as a citizen without the burden of past debts. [20] By

section 168.1(1)(a)(

i) of the BIA, the Bankrupt would normally have been entitled to an automatic discharge frombankruptcy nine months from the date of bankruptcy; that is, on April 29, 2017. If, however, a creditor or another person as identified inthat

section opposes the automatic discharge prior to the expiry of the nine month period, then the matter is to be set down for a hearingwithout delay. In this case, that hearing was initially set for May, 11, 2017. For various procedural reasons, the matter was put over fromtime to time and was finally heard by me on March 15, 2018. [21] The Nova Scotia Supreme Court in Re Crowley, [1984] N.S.J. No. 52, 54 C.B.R. (N.S.) 303 (N.S.S.C.), set out the principlesrelevant to a discharge application as follows: 6 First, each case must be decided on its own facts. That statement has been made in countless cases.

Re Gigault (1981), 37 C.B.R.(N.S.) 119 (Ont. C.A.), is but one. That is a simplistic statement but nevertheless very true, as is evident from a reading of the cases. Thisis so because s. 142 of the Bankruptcy Act provides no guidance for the exercise of the judge's discretion except that he must refuse anabsolute discharge if a s. 143 fact is proven against the bankrupt.

The court must look carefully at the causes of the bankruptcy. 7 Second, in considering the application for discharge, the court must have regard to not only the interests of the bankrupt and hiscreditors but also to the interest of the public: Re Sceptre Hardware Co., (SK QB), 3 C.B.R. 734, [1923] 1 W.W.R.966, [1923] 1 D.L.R. 1201 (Sask.).

This concept was well stated by Wetmore L.J.S.C., in (1983), (BC SC), 50 C.B.R.(N.S.) 182, 48 B.C.L.R. 387 (S.C.), where he said [p. 184], "The court must always balance the public interest in commercial moralitywith its interest in the re-establishment of the debtor". 8 Third, if, as is usually the case, the assets of the bankrupt are not of a value equal to 50 cents in the dollar of the bankrupt'sunsecured liabilities, the onus of proving that this fact arose from circumstances for which the bankrupt cannot justly be held responsibleis on the bankrupt: Re Lougheed, (BC SC), 54 B.C.R. 428, 21 C.B.R. 180, [1940] 1 W.W.R. 31. 9 Fourth, the court is not bound by the trustee's report but it is prima facie evidence with respect to the facts contained therein: ReHoerner, Williamson & Co. (1925), 5 C.B.R. 613 (Que.

S.C.). The trustee's report should be carefully considered by the court. Thetrustee should be in attendance at the discharge hearing so that he can be called by either the bankrupt or a party opposed to theapplication to explain the basis for his conclusions, be they favourable or unfavourable to the bankrupt. Pursuant to s. 140(5) of the Actthe statements in his report to the court are prima facie evidence but often no reasons are given for the opinions expressed.

For example,in the case before me the trustee's report simply says the causes of the bankruptcy were "misfortune" and that the conduct of the debtorwas not subject to censure. While the trustee was present in court, he was not called. It might have been helpful had he been cross-examined as to the "misfortune" he perceived so that the court could assess the reliability of his opinion. 10 Unless contradicted by the evidence, the court must accept the statements in the trustee's report: Re Barrick (1980), 36 C.B.R.(N.S.) 286 (B.C.C.A.).

The onus is on the party opposing the application for discharge to adduce sufficient evidence to justify the court

disregarding a trustee's report that is favourable to the bankrupt. By producing a favourable report the bankrupt has met the initial burdenof proving that the fact that the assets are not equal to 50 cents in the dollar of his unsecured liabilities arose from circumstances forwhich he cannot justly be held responsible. It is then up to the creditor opposing to bring before the court evidence upon which the courtcould come to a contrary conclusion: Dawson Auto Parts Ltd. v.

Dorais, (QC CA), [1944] R.L. 405, 26 C.B.R. 52(C.A.). 11 Fifth, if the application for discharge is opposed, the bankrupt should be available for cross-examination: Re Hood (1975), (ON SC), 21 C.B.R. (N.S.) 128 (Ont.). 12 Sixth, an order for discharge should only be outrightly refused if the debtor's conduct has been "particularly reprehensible, or in ...extreme cases". What is meant by this statement in Indust. Accept. Corp. v.

Lalonde [at p. 200] is that only rarely will there be an outrightrefusal of a discharge but rather the court will consider one of the other alternatives of suspension or attaching conditions to the dischargewhere an absolute discharge cannot be granted because a s. 143 fact has been proven unless the debtor's conduct has been particularlyreprehensible or in extreme cases. 13 Seventh, in considering if an order should be made that involves the payment of money by the bankrupt as a condition of hisdischarge, the court must bear in mind that he is entitled to have available for the maintenance of himself and his family a reasonableamount out of his after-acquired income: Clarkson v.

Tod, (SCC), [1934] S.C.R. 230, 15 C.B.R. 253, [1934] 2 D.L.R.316; Re Bayliss and Doerksen (1982), 40 C.B.R. (N.S.) 16 (Ont. H.C.). Accordingly, it is generally necessary for the court to have beforeit evidence of the bankrupt's income and living expenses so the court's discretion can be rationally exercised. 14 Eighth, the court does not view with favour assignments made to avoid paying a large claim of a single judgment creditor wherejudgment was obtained as a result of the discreditable conduct of the debtor.

Under such circumstances, the courts have generallyimposed a condition that the bankrupt consent to judgment in a partial amount of the claim: Kozack v. Richter, supra. This approach hasmost recently been followed by the Ontario Court of Appeal in Re Gigault, supra, and Re Balson (1982), 46 C.B.R. (N.S.) 319. Inthe Gigault case, the judge who heard the application in the first instance had required as a condition of discharge that the bankruptconsent to judgment in a very nominal amount and in the Balson case an absolute discharge had been granted.

The Ontario Court ofAppeal in both cases imposed meaningful payments as a condition of discharge. [22] Subsection 172(2) and subsections 173(1)(a), (

d) and (

k) of the BIA, respectively, describe the applicable powers of the Courton this opposition hearing and the factors to be decided: 172(2) The court shall, on proof of any of the facts referred to in

section 173, which proof may be given orally under oath, by affidavit orotherwise, (

a) refuse the discharge of a bankrupt; (

b) suspend the discharge for such period as the court thinks proper; or (

c) require the bankrupt, as a condition of his discharge, to perform such acts, pay such moneys, consent to such judgments or complywith such other terms as the court may direct. […] 173(1) The facts referred to in

section 172 are: (

a) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities,unless the bankrupt satisfies the court that the fact that the assets are not of a value equal to fifty cents on the dollar on the amount of thebankrupt’s unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible; […] (

d) the bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the bankrupt’s liabilities; […]

(

k) the bankrupt has been guilty of any fraud or fraudulent breach of trust; […] [23] When one or more of the grounds to oppose an absolute discharge identified in

section 173 is established, the Court has nodiscretion to order an absolute discharge. That is, the BIA recognizes that a discharge from bankruptcy is not available as of right, and insome situations its public policy rationale will not be furthered by a discharge. In such cases, the discharge may be refused, it may besuspended for a period of time, or it may be made subject to conditions, including paying money or consenting to a judgment. Has the bankrupt been guilty of fraud or fraudulent breach of trust? [24] Under section 173(1)(

k) of the BIA, an absolute discharge is not available to a bankrupt who has been found guilty of fraud orfraudulent breach of trust. This ensures that dishonest debtors do not benefit from their misconduct. [25] The Complaints Authorization Committee of the Law Society of Newfoundland and Labrador investigated the allegedfraudulent conduct of the Bankrupt, and determined that there were reasonable grounds to suspect that he had committed conductdeserving of sanction.

The issue was then heard by an Adjudication Tribunal of the Law Society where it was determined as a finding offact that the alleged misconduct occurred. [26] The Law Society submits that as a statutory tribunal of competent jurisdiction, the determination by the Adjudication Tribunalconstitutes a finding that the Bankrupt has been guilty of fraud or fraudulent breach of trust for the purposes of section 173(1)(k).

I agree.The determination was within the statutory jurisdiction of the Adjudication Tribunal and the determination of the question was necessaryto decide the issue before it (see, Coyle, Re, 2011 NSSC 238 at paragraphs 56 to 57). [27] Whether the finding of fraud was made in a previous proceeding, or is made by the Court on the discharge hearing, there is norequirement that it be proven beyond a reasonable doubt. Rather, it is sufficient that fraud be proven on the civil standard of balance ofprobabilities (see, Re Aby, (SK KB), [1995] S.J. No. 677, [1996] 2 W.W.R. 488 (Sask.

QB) at paragraph 26). [28] The Law Society submits that the fact that the Bankrupt did not appear at or make submissions to the Adjudication Tribunalshould not change the fact that there is a valid finding that the Bankrupt has been guilty of fraud. I agree with this as well. The Bankruptwas provided an opportunity to appear. The March 2, 2017 decision of the Adjudication Tribunal demonstrates that the evidence wasevaluated and the matter was adjudicated on its merits.

Furthermore, the determination of the Adjudication Tribunal was subject to anautomatic right of appeal to this Court (section 55.2 of the Law Society Act, 1999, S.N.L. 1999 c. L-9.1). [29] Here, the Bankrupt has been found guilty of fraudulent behavior.

Furthermore, he admits to it in his brief where at paragraph 14he states, “[The Bankrupt] misappropriated funds, then repaid them prior to the bankruptcy.” Although it was not the Bankrupt whorepaid the funds, but his former spouse, for present purposes what is important is that Drover admits the fraud. [30] The Bankrupt’s response to the position of the Law Society in this regard is his contention that section 173(1)(

k) does notapply because there were no fraudulently obtained monies owing by him at the time of his bankruptcy. For this proposition he relies onIn Re Goldstein, 2011 ONSC 561, where the court considered the application for discharge of a solicitor formerly practicing in Ontario.The Law Society of Upper Canada (“LSUC”) had made a determination following a hearing that Goldstein was guilty of fraudulentconduct to obtain mortgage funds. As a consequence the LSUC revoked Goldstein’s license to practice. Shortly after his disbarmentGoldstein declared bankruptcy.

The LSUC filed a proof of claim for $60,000 representing the costs of the disciplinary hearing. TheOntario Superior Court of Justice stated: […] [5] In respect of the $60,000 costs award, the LSUC was named as a creditor in Mr. Goldstein’s Statement of Affairs and the LSUChas filed its proof of claim. [6] An order of discharge does not release a bankrupt from any debt or liability arising out of fraud while acting in a fiduciarycapacity or resulting from obtaining property by false pretenses or fraudulent misrepresentation. (BIA, s. 178(1)(

d) and (e).) [7] The LSUC contends that it is entitled to a declaration that the costs order will not be released by any discharge obtained byMr. Goldstein. [8] There is authority for the proposition that not only is the principal amount of a judgment against a bankrupt on a debt or liabilityarising out of fraud, embezzlement, etc., while acting in a fiduciary capacity, not released by discharge, the costs of the creditor inobtaining the judgment and interest on the judgment also fall, within s. 178(1)(

d) and consequently are not released by an order ofdischarge. (See Mehr (Re) (1989), 76 C.B.R. (N.S.) 113 (B.C.S.C.), but see contra, Dauphin Plains Credit Union Ltd. v. Barber, (MB KB), [1987] 2 W.W.R. 245 (Man. Q.B.).)

[9] However, these cases presuppose that there is a debt owing arising out of fraud, embezzlement, etc. [10] In this case, there is no evidence of such a debt. Rather, the costs award arose out of the hearings that resulted in Mr. Goldstein’s disbarment. There is no evidence that the LSUC has been defrauded or that the LSUC has any claim against Mr. Goldstein over and above the claim for costs. Mr.

Goldstein was disbarred for professional misconduct, having conceded the fraudulent nature of certain real estate transactions. (Paragraph 79 of the LSUC Reasons for Decision, dated December 29, 2008.) [11] It seems to me that, while there is a debt owing to the LSUC arising from the costs award, it cannot be said that this is a debt or liability that falls within either s. 178(1)(

d) or (e). The costs award is not part of any fraud committed by Mr. Goldstein against the LSUC. [ 31 ] At first blush I do not take issue with the reasoning or result in Goldstein . The difficulty for the Bankrupt is that it is a case involving sections 178(1) (

d) and (

e) of the BIA , not section 173(1)(k). It is important not to conflate the purpose and effect of section 173(1) (

k) of the BIA with sections 178(1) (

d) and (e). The former addresses the effect of fraudulent behavior on a bankrupt’s entitlement to a discharge; the latter address the effect of fraudulent behavior on the status of the indebtedness following a discharge from bankruptcy. By section 173(1)(k), a bankrupt who has been found guilty of fraud is not entitled to an absolute discharge, whether or not monies owing from the fraud appear on his statement of affairs. By section 178(1)(d), monies owing from the fraud at the date of the bankruptcy are not released on a bankrupt’s discharge. That is, section 178(1)(

d) serves to protect vulnerable creditors while section 173(1)(

k) serves to ensure that dishonest debtors are not given an unfair advantage by the bankruptcy process ( Korea Data Systems (USA), Inc. v. Amazing Technologies Inc. , 2015 ONCA 465 at paragraph 68 , 76 and 77). [ 32 ] The Bankrupt may very well be able to be rely upon Goldstein in the event that the Creditors seek to have their disciplinary costs and custodial expenses survive the Bankrupt’s discharge, but it is of no assistance to him in this discharge application.

Furthermore, such a determination would involve issues that are not before me and upon which I make no further comment. [ 33 ] The Bankrupt committed a serious series of frauds. That fraudulent activity led him on his inexorable path to bankruptcy. I am satisfied that the Bankrupt’s circumstances bring him squarely within section 173(1)(

k) of the BIA and for that reason alone he is not entitled to an absolute discharge from bankruptcy. Has the bankrupt failed to satisfactorily account for a deficiency of assets? [ 34 ] As a mechanism to ensure accountability of a bankrupt, the BIA requires the Bankrupt to explain how his financial situation arose. If he cannot satisfactorily explain why he is in a position where he does not have assets to fulfil his debt obligations, an absolute discharge is not available ( section 173(1) (

d) of the BIA ). [ 35 ] The Creditors submit that the liabilities at issue here are amounts directly connected to the misappropriation of client funds and fraud committed by the Bankrupt. Because the Bankrupt has provided no explanation as to where these funds were diverted, this lack of accounting for the deficiency should preclude the Bankrupt from receiving an absolute discharge. [ 36 ] The Bankrupt submits that the affidavit evidence adduced by him satisfactorily explains the combination of circumstances which lead to his bankruptcy.

In particular, inter alia , he claims: a. the recession of 2008 had a significant negative impact on certain real estate investments he made around that time; b. the recession contributed to the loss of over $1,000,000 in securities previously held by his family; c. the downturn in the oil industry at the same time as the recession resulted in his loss of a tenant on whom he had counted for 4 years of substantial rental income: d. His wife commenced a new career and business venture in the years leading up to him seeking bankruptcy protection, in respect of which significant costs were absorbed by him; e.

An individual owing him in excess of $120,000.00 declared bankruptcy, rendering the debt uncollectable; and f. at or around the date of the suspension of his practice, a client of his proved unsuccessful in closing a transaction which would have seen the Bankrupt paid sufficient moneys to retire all debts owed by him at that time.

The Bankrupt’s reliance on the anticipated funds from that transaction was the precipitating event which led to the suspension and subsequent bankruptcy. [ 37 ] In his Report, in response to the question “Can the bankrupt be justly held responsible for any of the facts referred to pursuant to

section 173 of the BIA ?”, the Trustee says “The bankrupt can be held responsible for the following: Bankrupt has been found guilty of fraud or fraudulent breach of trust”. The Trustee, therefore, does not take the position that bankrupt has failed to satisfactorily account for the deficiency of assets. [ 38 ] The Court of Queen’s Bench of Alberta in 2000 in Re Hayden , 2000 ABQB 630 noted the following: [8] The 2000 Annotated Bankruptcy & Insolvency Act by Holden and Morowetz at page 596 states the general principles in relation to a trustee’s report:

Unless contradicted by other evidence, the court must accept the statements contained in the report: Re Barrick (1980), 36 C.B.R. (N.S.)286 (B.C.C.A.);Re Crowley (1984), (NS SC), 54 C.B.R. (N.S.) 303, 66 N.S.R. (2d) 390, 152 A.P.R. 390 (T.D.). Butthe court is not bound by the trustee’s report: Re Young (1928),10 C.B.R. 53 (N.B.K.B.); Re Kemper, [1961] O.W.N. 288, 2 C.B.R.(N.S.) 130 (S.C.).

The report is, however, entitled to considerable weight: Re Barrick, supra; Re Crowley, supra; Re Simpson (1984), 50C.B.R. (N.S.) 109 (B.C.S.C.). [39] Similarly, the Court of Queen’s Bench of New Brunswick in Re Bourque (Trustee) 2001 NBQB 147 noted, “The Trustee in hissection 170 Report indicated that no offences had been committed by the Bankrupt and recommended an absolute discharge. The onustherefore falls upon the objecting creditor to satisfy the Court that a misconduct listed in

section 173 has in fact been committed.” [40] I am satisfied, therefore, that the Trustee has made a determination that other than the issue of fraud (section 173(1)(k)) thereare no other facts pursuant to

section 173 that are relevant to the proceedings. Therefore, the onus shifts to the Creditors to satisfy thecourt that the misconduct identified in section 173(1)(

d) has been committed. [41] The Creditors have not provided the Court with any proof of a fact referred to in section 173(1)(d). Any failure by theBankrupt to account for the diversion of the misappropriated funds is no longer at issue because they have been repaid (albeit not by theBankrupt). Accordingly, the Creditors have not satisfied me that they have met the onus under section 173(1)(d).

The assets are not of a value equal to fifty cents on the dollar [42] The Trustee’s Report discloses that the Bankrupt’s realized assets produced approximately $1500 from the sale of personaleffects against proven unsecured claims of $1,092,729.23. Once it is established as a factual matter that the assets of the Bankrupt areless than fifty cents on the dollar on the amount of his unsecured liabilities, section 173(1)(

a) of the BIA places the onus on him toestablish circumstances by which he cannot justly be held responsible for that fact. The Trustee’s report shows that the Bankrupt’s assetsfall well below this threshold. [43] Of significance when determining whether or not the Bankrupt can be justly held responsible for the deficiency arecircumstances that are outside of the control of a bankrupt.

Situations that resulted in unusual liabilities, an unexpected dissipation ofassets or a loss of earning capacity would be relevant factors (see, Snedden, Re, 2004 NLSCTD 60). [44] The Creditors submit that the liabilities in question have arisen out of the intentional, fraudulent conduct of the Bankrupt. Heengaged in that pattern of conduct for a period of over three years. He was found guilty by the Adjudication Tribunal of conductdeserving of sanction.

The Bankrupt has a high degree of moral culpability say the Creditors and, as such, he can and should justly beheld responsible for the debts incurred as a result of his behaviour. [45] The Bankrupt submits that the Creditors have adduced no evidence to establish the facts referred to in section 173(1)(a), andspecifically, that such shortfall has arisen from circumstances for which he should justly be held accountable. Therefore, he says, havingfailed to lead evidence in that regard, the Trustee’s determination that no such facts exist should be accepted by the Court and that noviolation of section 173(1)(

a) is therefore made out. [46] I am unable to agree with the position taken by the Bankrupt. Absent his fraud, it was his financial avidity that led him to enterinto a series of transactions that made him vulnerable in the event of an economic downturn. But that vulnerability may not haveinevitably led to bankruptcy. It is possible that through diligently working at his law practice the Bankrupt could have avoidedbankruptcy. If things became perilous, it may have been open to him to make a proposal to his creditors pursuant to

Part III of the BIA. Itwas his deliberate intention to attempt avoidance of the consequences of insolvency through fraudulent activity that, once he was caught,led to his bankruptcy. That being the case, I find that the Bankrupt has not satisfied me that he cannot justly be held responsible for thatfact that his assets are less than fifty cents on the dollar on the amount of his unsecured liabilities.

Issue 2 – What order or disposition should the court make? [47] I have found that two facts under section 173(1) have been established – that the Bankrupt engaged in fraudulent activity, andthat he can justly be held responsible for the fact that his assets are less than fifty cents on the dollar. What should the consequence be ofthese findings? [48] I am mindful of the caution in Crowley that an order for discharge should only be outrightly refused if the debtor's conduct hasbeen particularly reprehensible or in other extreme cases.

That is, only rarely should there be an outright refusal of a discharge but ratherI should consider one of the other alternatives of suspension or attaching conditions to the discharge. [49] Also as stated in Crowley, in considering if an order should be made that involves the payment of money by the Bankrupt as acondition of his discharge, I need bear in mind that he is entitled to have available for the maintenance of himself and his family areasonable amount out of his after-acquired income. [50] Given that the claims against the Bankrupt are still being assessed, the Creditors submit it would be premature to grant adischarge to the Bankrupt on any conditions at this time.

Instead it is proposed that a reasonable period be granted to complete theassessment of the pecuniary loss caused by the fraudulent conduct of the Bankrupt. [51] The Bankrupt submits that if he is not entitled to his automatic discharge, then he should be granted an “unconditionaldischarge … following the expiration of one (1) week following the conclusion of the within hearing”. [52] I am unable to accede to the request of the Creditors for a delay in the Bankrupt’s discharge. This matter has been ongoingsince 2014.

Although the matter is undoubtedly complex, further investigations by the Custodian will do nothing to assist the creditors ofthe Bankrupt’s estate, other than to increase the amounts for which it is liable. This is because it is not anticipated that furtherproceedings will result in the identification of additional assets for realization and distribution. The Bankrupt already finds himselfundischarged more than a year after his nominal automatic discharge date. It is time to bring the bankruptcy proceeding to an end.

[ 53 ] The series of three cases involving the lawyer Wirick in British Columbia is instructive. That matter was originally brought before the court on an application by the Law Society there seeking a declaration that fraud had been established for the purposes of section 173(1) (k). That declaration was granted by the court ( Wirick, Re , 2004 BCSC 1826 ). Mr. Wirick then applied for his discharge from bankruptcy. At the discharge hearing, the Law Society requested that the application be dismissed pending completion of a global audit of his law practice.

This request was also granted by the court ( Wirick, Re , 2005 BCSC 1906 ). Following completion of the investigation, Mr. Wirick made another application for discharge. The Law Society requested that the discharge be absolutely refused based on the reprehensible conduct of the bankrupt in incurring the liabilities. The Law Society had filed a proof of claim totaling approximately $4,000,000.

In Wirick, Re, 2006 BCSC 1273 , the court noted that it seemed unlikely that the bankrupt would have the means to pay any significant amount, but also noted that the public interest in the trust of lawyers requires some terms be imposed. The court determined that it was appropriate to require the lawyer to consent to a judgment in favour of the Law Society in the amount of $500,000 as a condition of his discharge from bankruptcy. [ 54 ] I conclude that the course taken by the Supreme Court in British Columbia is appropriate in the context of this case. The behaviour of Mr.

Drover has been reprehensible, but not so much so that his discharge should be further delayed. I understand that he is subject to criminal prosecution and am satisfied that the criminal court is the appropriate forum for meting out punishment if it is found to be deserved. The Bankruptcy Court interest is in the integrity of the interactions between individuals and their creditors. In the circumstances of this case, Mr. Drover’s clients ought never to have been his creditors. That the monies defrauded by him have been repaid by a third party does not diminish his culpability.

It was his fraud that resulted in the Creditors being owed a significant amount of money. [ 55 ] I have before me evidence of the Bankrupt's income and living expenses. Although the Bankrupt finds himself of limited means and his ability to earn a living as a lawyer has been squandered, the high moral responsibility carried by members of the legal profession requires that there be some additional financial consequence for his behaviour.

Although I note that the Bankrupt disputes some of the amounts claimed by the Creditors, and that other amounts remain contingent, I am satisfied that the combined obligations to the two of them are at least $400,000. [ 56 ] I order that the Bankrupt be discharged from bankruptcy on the condition that he enter into a Consent Judgment jointly in favour of the Law Society and the Custodian in the amount of $50,000. [ 57 ] I make no order as to costs. _____________________________ Robert P. Stack Justice